Sterling rallied early on Monday after the EU and UK decided to “go the extra mile” and continue Brexit trade negotiations.
The pound climbed 1.2 per cent against the dollar in morning dealings in London to $1.3385. It advanced 0.9 per cent against the euro to €1.1014.
Monday’s gains partially reversed last week’s 1.6 per cent fall, which was triggered by warnings from EU and UK leaders that Britain could leave the bloc without a trade deal when the Brexit transition period concluded at the end of this year.
Boris Johnson, UK prime minister, and Ursula von der Leyen, European Commission president, agreed in a “constructive” call on Sunday to “go the extra mile” in an attempt to break the deadlock, as both sides reported progress. Still, no deadline was set for negotiations and British officials admitted they could drag on until Christmas.
Goldman Sachs said late on Sunday it expected sterling to rise up to 2 per cent against the euro on “the apparent progress towards a deal — or at least avoiding a no-deal outcome for now”.
Barclays analysts cautioned, however, that negative risks to the pound would persist until negotiators reach an agreement. If the EU and UK make a deal, the currency could trade above $1.35, the bank said. In the case of a no-deal outcome, Barclays expected the pound to drop to about $1.25.
“A deal narrowly remains our base case and . . . we expect the pound to bounce ultimately,” strategists at the UK bank said.
Gregory Perdon, co-chief investment officer at Arbuthnot Latham, said he had “second thoughts” late last week about his bet that sterling would rise. However, he decided to stick to his “conviction” since “both parties are probably better off economically with a deal”.
“Let’s hope rationality wins in this instance,” he said.
Sterling’s gains on Monday come ahead of this Thursday’s Bank of England meeting. Economists broadly expect the central bank to hold steady on policy after it boosted its bond-buying programme by £150bn at its November meeting.
Bank of America said Brexit news remained the potential near-term catalyst for a change at the BoE and “if markets became jittery the BoE could increase the QE purchase pace at short notice”.
Measures of expected volatility in sterling over the next month remain elevated, signalling heightened market expectations for tumult in the pound as 2020 nears its end.
“An EU trade agreement was never going to be all-encompassing and therefore definitive for the UK’s economic future,” said David Bailin, chief investment officer at Citi Private Bank. “The pound could still move sharply on a deal or no-deal event, with all the action coming fast and unpredictably.”